Engaging with business for agricultural growth: Opportunities and risks

This article briefly presents how the European Union intends to engage the private sector in agriculture and food and nutrition security development in the coming years, in particular with its new Agriculture Financing Initiative, AgriFI.

A challenge…

In May 2014, the European Commission adopted a Communication titled “A Stronger Role of the Private Sector in Achieving Inclusive and Sustainable Growth in Developing Countries”. This clear policy orientation resulted from the evidence that the private sector had a key role to play in fostering development.

In developing countries, 90% of jobs are provided by the private sector. Decent jobs creation is obviously the best and probably unique way to eradicate poverty, the private sector is thus an essential partner in the fight against poverty.

In the field of agriculture and food security, the challenge is to be able to feed 9 billion people by 2050, provide jobs, get producers out of poverty, and ensure sustainable use of natural resources. This implies a very significant increase of agriculture production which will not be met without massive private sector investment.

It is for this reason that one of the main development challenges is to find the most effective way to boost responsible private sector investment. The renewed interest of the private sector to invest in food systems which emerged after the food prices crisis of 2007-2008 is an opportunity that must be seized.

It is my view that we should team up with the private sector. The resulting partnerships with the private sector must be fully in line with the objective of poverty eradication, which remains the overarching goal of our public development policy. This is a duty, vis-à-vis both European citizens as tax payers and the populations of the partner countries.

The EU response…

Policies and public investments play a critical role in enabling, facilitating and guiding private sector development. The support the European Union (EU) has been providing to governments and institutions will continue. The dialogue on policies is actually a key driver, not only for building an enabling environment for private sector investment and in fine sustained growth, but also to ensure a fair distribution of growth benefits, the promotion of environmentally friendly practices and the enforcement of internationally recognised social rights.

Complementing this classical development approach, and in order to effectively contribute to foster private sector investment in food systems development, the EU is designing a specific Agriculture Financing Initiative: AgriFI.

Why AgriFI?

Increased investment in rural areas is notably essential to achieve development for the 75% of the poor living in rural areas. Beyond public financing additional investment is needed to enhance the development impact of the interventions and achieve impact at scale. To achieve inclusive and sustainable agricultural growth, increased investment in smallholder agriculture and agribusiness medium, small and micro enterprises (MSMEs) is required. As already mentioned, investment in agriculture in developing countries is growing, but initiatives to support the investment capacity of small producers and rural MSMEs remain largely insufficient. This is not only due to the inherent risks in agricultural production (weather and environmental conditions, quantity and quality of produce, market prices), but also to higher risks associated with smallholder production (limited technological and innovative capacities, market failures inefficiencies and distortions, limited access to financial services and markets), as well as the high cost of doing business in small rural markets.

What is AgriFI?

AgriFI is a new EU-initiative addressing the aforementioned situation aiming to improve the capacity to bear risk using public money in order to encourage project promoters and attract private finance to viable investments which would not have materialised otherwise. AgriFI is therefore about addressing market failures. It aims at financing those actions that have a clear development impact on those that would otherwise not be reached. This includes smallholders with limited market orientation, vulnerable groups, women and youth, farmers and entrepreneurs.

The key feature of AgriFI is that the provision of EU support will mobilise additional public and private investment, in particular through the provision of risk capital, guarantees or other risk-sharing mechanisms. EU support will contribute to “de-risking” the investment and therefore to close a financing gap.

AgriFI responds to the lack of financing mechanisms adapted to farmers and agri-entrepreneurs, particularly smallholders and agribusiness MSMEs.

How does AgriFI work?

AgriFI is an initiative under which we envisage that various programmes will be implemented, funded from the different EU financial instruments and sources, notably through the existing EU blending mechanisms which allow combining grants from EU funding and loans from Development Financial Institutions.

AgriFI relies upon 3 pillars:

investment,

business development and advisory services to farmers and agri-entrepreneurs; and

a robust monitoring framework based on value chain analysis for better accountability and decision making.

EU support to investments will be governed by a set of guiding principles and criteria, as reflected in the Commission Communication on the private sector. All investments will have to demonstrate that they are economically viable and inclusive, as well as environmentally and socially sustainable. Business development and advisory services are needed to set-up bankable projects based on innovative business and risk management plans, as well as to provide capacity building to strengthen the participation of smallholders and MSME agribusinesses in the value chains. We believe that local partners and organisations will have a major role to play in this.

AgriFI intents fostering the development of sustainable value chains and food systems to achieve food security and improve nutrition through: i) linking commercial-oriented smallholder farmer to markets; ii) creating decent jobs with a specific attention to women and youth; and iii) improving access to nutritious foods at affordable prices. This food systems approach will facilitate broader interventions along the value chain, in particular on food safety and quality standards, both for domestic and export markets.

Managing the risk and ensuring accountability…

In order to inform the decision making process and monitor the evaluation of actions involving close cooperation with private sector stakeholders, a framework based on value chain analysis will allow to inform specific criteria related to the 3 pillars of development: economic, environmental and social. It is EU’s intention to analyse every investment according to its contribution to:

All projects should therefore be in line with the Voluntary Guidelines on the Governance of the Tenure of Land (VGGT) and the Principles for Responsible Investment in Agriculture and Food Systems (PRAI), internationally agreed under the auspices of the Committee on World Food Security (CFS).

The way ahead: post 2015 agenda…

We believe that this AgriFI initiative is fully in line with the on-going discussions on the role of private sector in the context of the Post-2015 agenda. Partnership is among the essential elements for delivering on Sustainable Development Goals (SDGs).

Coordinated public and private sector investment in food value chains and food systems is a critical element to achieve Sustainable Development Goal 2 on “ending hunger, achieving food security and improved nutrition and promoting sustainable agriculture” and Goal 8 on “inclusive and sustainable economic growth, full and productive employment and decent work for all”. The EU intends to be at the forefront to contribute to this accomplishment.

About the author

Dr Roberto Ridolfi is Director of the European Commission for Sustainable Growth and Development at DG for International Cooperation and Development.

Photo: Arusha Blooms in Tanzania, where green beans are processed and prepared for export to European markets. Credits: Fintrac. Inc.